Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

On the first day of its fiscal year, Ebert Company issued $12,500,000 of 10-year, 7% bonds to finance its operations. Interest is payable semiannually. The

On the first day of its fiscal year, Ebert Company issued $12,500,000 of 10-year, 7% bonds to finance its operations. Interest is payable semiannually. The bonds were issued at a market (effective) interest rate of 9%, resulting in Ebert receiving cash of $10,873,974. The company uses the interest method.

Required:

a. Journalize the entries to record the following transactions. Refer to the Chart of Accounts for exact wording of account titles.
1. Sale of the bonds on January 1.
2. First semiannual interest payment on June 30, including amortization of discount. Round to the nearest dollar.
3. Second semiannual interest payment on December 31, including amortization of discount. Round to the nearest dollar.
b. Compute the amount of the bond interest expense for the first year.
c. Explain why the company was able to issue the bonds for only $10,873,974 rather than for the face amount of $12,500,000.

b. Compute the amount of the bond interest expense for the first year. Enter amounts as a positive number.

Annual interest paid
Discount amortized
Interest expense for first year

c. Explain why the company was able to issue the bonds for only $10,873,974 rather than for the face amount of $12,500,000.

The bonds sell for less than their face amount because the market rate of interest is the contract rate of interest. Investors willing to pay the full face amount for bonds that pay a lower contract rate of interest than the rate they could earn on similar bonds (market rate).

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Cost Accounting A Managerial Emphasis

Authors: Srikant M. Datar, Madhav V. Rajan, Charles T. Horngren, Louis Beaubien, Chris Graham

7th Canadian Edition

133138445, 978-0133926330, 133926338, 978-0133138443

More Books

Students also viewed these Accounting questions

Question

Can low efficacy agonist be more potent than high efficacy agonist?

Answered: 1 week ago